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06/06/2008

Friday, 6th June, 2008: In a Recommendation issued to EU Member States today, the EU Commission has recommended that the civil liability of statutory auditors and audit firms arising from breaches of their professional duties should be limited, except in cases of intentional breach of duties by statutory auditors or audit firms. The Commission has further recommended that:

the limitation of liability should apply against the company audited and any third party entitled under national law to bring a claim for compensation; and

any limitation of civil liability should not prevent injured parties from being fairly compensated.

The Recommendation does not prescribe a single means by which Member States might introduce limits on liability. Rather, the Commission has recommended that any one or more of the following methods in particular be used:

establishment of a maximum financial amount or of a formula allowing for the calculation of such an amount (i.e. a cap);

establishment of a set of principles by virtue of which a statutory auditor or an audit firm is not liable beyond its actual contribution to the loss suffered by a claimant and is accordingly not jointly and severally liable with other wrongdoers (i.e. proportionate liability);

provision allowing any company to be audited and the statutory auditor or audit firm to determine a limitation of liability in an agreement (i.e. limitation by contract).

The Commission has further recommended that, before adopting measures implementing any of the methods referred to above (or any other method of limiting liability), Member States should take into account the impact any such limitation of liability on financial markets and investors and on conditions for access to the market of statutory audit for listed companies, as well as the impact on audit quality, insurability of risks and the companies to be audited.

Explaining the context for the Recommendation, Internal Market and Services Commissioner, Charlie McCreevy said: “After in-depth research and extensive consultation, we have concluded that unlimited liability combined with insufficient insurance cover is no longer tenable. It is a potentially huge problem for our capital markets and for auditors working on an international scale. The current conditions are not only preventing the entry of new players in the international audit market, but are also threatening existing firms. In a context of high concentration and limited choice of audit firms, this situation could lead to damaging consequences for European capital markets.”

Domestically, the issue of auditors’ liability reform was referred to the Company Law Review Group (CLRG) last year by the Minister for Trade & Commerce and the CLRG is expected to report its conclusions and recommendations shortly.

The full text of the Recommendation, together with the associated Commission press statement, can be accessed here.